CREDIT QUALITY OF U.S. WHOLESALE BANKS MAY NOT FARE AS WELL AS RETAIL BANKS' IN AN ERA OF CONSOLIDATION, MOODY'S REPORTS
New York, August 4, 1998 - - The growing trend towards consolidation may not affect the ratings for U.S. wholesale banks as positively as those of retail banks, largely because "cultural challenges may be tougher to overcome in mergers between major banks and major securities firms," Moody's Investors Service concludes in its annual credit report on the nation's banking system.
The rating agency adds, however, that the credit-bolstering benefits of consolidation are much clearer for retail banks--which is especially evident after line-of-business analysis is applied- -because certain efficiencies "can clearly be improved in a sector dominated by mature markets, such as those involving retail deposits and credit cards," according to the report.
But, for wholesale banks, Moody's believes that "distinct challenges tend to arise when banks make acquisitions in capital market business lines." These challenges frequently occur because of cultural issues, but also because the opportunities for cost efficiencies can be more constrained, the rating agency states.
Moody's says that "bank managements may consider an acquisition of a major securities company to be the quickest way to deal in more lucrative securities activities that are currently dominated by a handful of such entities." The rating agency also points out that "the creation of a seamless wholesale franchise capturing the merits of commercial banking and investment banking has been a long-term goal for a number of managerial teams - - but, despite their enthusiasm, the record is filled with disappointments."
Moody's noted that, currently, earnings from wholesale banking tend to be dominated by proprietary activities, lending, and for a few, securities processing. On the upside, however, mergers or acquisitions may improve the marketing power of a wholesale bank's corporate lending, as well as providing the necessary volume to justify needed reinvestment in the growing wholesale securities-processing business, Moody's states.
"To take one example," the report states, "the underwriting power of Chase is now greater than the separate underwriting capacities of its predecessors: Manufacturers Hanover, Chemical, and Chase." The mergers of the three banks allowed Chase to incrementally increase its dominance in the loan syndication markets, according to Moody's.
In terms of positive rating implications, Moody's has used line-of-business analysis to reach a comfort level about the consolidation process of the retail banking sector. Retail banking is dominated by two products, low-coupon deposits and credit cards. "These mature businesses provide compelling arguments for consolidations, which are being well executed by seasoned management teams," the report states.
Meanwhile, acquisitions of successful non-bank competitors in the retail sector can furnish opportunities for banks to upgrade their marketing and selling skills, Moody's says. "Even when banks buy non-banks, cultural issues appear to be minimal in the retail sector. Managerial responsibilities tend to be dictated by expertise rather than ego," states Sean Jones, senior vice president of Moody's and an author of the report.
"In the retail sector, there tends to be a fair amount of agreement in managerial ranks about the real benefits of consolidation, and how--or if--consolidation strategies should be executed," says Mr. Jones.
The report includes the line-of-business breakdown for major U.S. retail and wholesale banks. It includes a detailed financial description the following entities:
*Banc One (A merger between Banc One and First Chicago NBD)
Rating Actions: Banc One's ratings are confirmed (senior at Aa3); Ratings outlook changed to stable. Ratings of First Chicago NBD (senior at A1) are on review for possible upgrade.
*BankAmerica (A merger between NationsBank and BankAmerica)
Rating Outlook: Ratings for NationsBank (senior at Aa3) and BankAmerica (Senior at Aa3) are on review for possible upgrade.
*BankBoston Corporation - - Rating Outlook: Stable (senior at A2)
*Bank of New York Company, Inc. - - Rating Outlook: Positive (senior at A1)
*Bankers Trust Company - - Rating Outlook: Negative (senior at A2)
*Chase Manhattan Corporation - - Rating Outlook: Stable (senior at Aa3)
*Citigroup (A merger between Citicorp and Travelers)
Rating Outlook: Citicorp ratings (senior at Aa3) are on review for possible upgrade. Rating on Citibank (Aa2 for deposits) was confirmed. Travelers ratings (senior at Aa3) are on review for possible upgrade.
*Fleet Financial Group - - Rating Outlook: Stable (senior at A2)
*First Union Including Corestates - - Rating Outlook: Stable (senior at A1)
*Mellon - - Rating Outlook: Positive (senior at A2)
*J.P. Morgan & Co. Incorporated - - Rating Outlook: Stable (senior at Aa3)
*National City - - Rating Outlook: Stable (senior at A1)
*PNC - - Rating Outlook: Stable (senior at A2)
*US Bancorp - - Rating Outlook: Stable (senior at A1)
*Wells Fargo (A merger between Norwest and Wells Fargo)
Rating Outlook: Norwest's ratings are confirmed (senior at Aa3) with a positive outlook. Wells Fargo's ratings (senior at A1) are on review for possible upgrade.
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NOTE TO JOURNALISTS: For a copy of this Moody's report, please contact Donna Gee in New York (212) 553-0376, Andrew Chmaj in London (171) 772-5454, Juan Pablo Soriano in Madrid (341) 310 1454, Beverly Hughes in Sydney (612) 9270 8111, Mauricette Salque in Paris (331) 53 30 10 20, Juergen Berblinger in Frankfurt (4969) 242 840, Velvet Yoshinami in Tokyo (813) 3593 0734, Hilary Parkes in Toronto (416) 214-1635, Edward Young in Hong Kong (8522) 509 0200, Patrick Winsbury in Singapore (65) 320 8330 or Christiana Aguiar in São Paulo (5511) 3043-7186.
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